Rising Stars Buy: Pebblebrook Hotel Trust (Again)

"The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch."

Warren Buffett's words are as true now as ever. The obvious message is to wait, patiently, for your pitch. The implied second message, which Buffett has perfected, is that when your pitch does come, you need to swing. Hard.

The first pitch we swung at for the Young Gun Portfolio was Pebblebrook Hotel Trust (NYSE: PEB) . This opportunistic hotel play remains my highest-conviction idea, and with its recent dip in price, it's time to book another room.

As I outlined in my initial buy recommendation, Pebblebrook is an investment vehicle formed solely to take advantage of cheap hotels going on sale in the wake of the real estate crash. Nothing about my thesis has changed since.

Great deal pricesCEO Jon Bortz and his team continue to see the fire-sale hotel prices that prompted him to come out of retirement and form Pebblebrook in the first place. The company's latest deal, for the Argonaut Hotel near Fisherman's Wharf in San Francisco, closed at a 25% discount to replacement cost. Furthermore, Bortz said recently that he refuses to chase hotels if competing bidders drive up their prices. I like that discipline -- and it should continue net us superior deals.

Strict style disciplineAn analyst on the last conference call asked Bortz whether he would consider looking for hotels in suburban locations, outside his tried-and-true specialty of upscale, urban properties. Bortz's answer was a resounding no; he's sticking to the niche that made his name over the past 17 years. Buffett would be proud of Bortz's ability to stay in his circle of competence.

Opportunistic to the boneBortz's penchant for picking up hotels cheaply is impressive, but his dexterity in capitalizing on unique situations is even more remarkable. His first hotel purchase was the Bethesda Doubletree. Located in Bethesda, Maryland, the Doubletree is the closest hotel to both the National Institute of Health and the National Naval Medical Center, which are undergoing a joint $1 billion expansion. When completed later this year, it's expected to double both facilities' number of visitors. Shouldn't be hard to keep the Doubletree's rooms filled after that.

Bortz's opportunistic streak showed up again in two recent purchases. The Sofitel Philadelphia is located close by the Philadelphia Convention Center, a 60% expansion of which is scheduled to be finished in the second half of this year. And the Argonaut Hotel -- besides being designated a national historic landmark -- is set to benefit from the America's Cup, which will be hosted in San Francisco and headquartered just a few blocks from the hotel.

OK, maybe ONE thing has changedIf anything, Bortz and his team's resolve in sticking to their guns has strengthened my confidence in the company. On top of that, the latest annual report and conference call have given us more insight into Pebblebrook's financial workings. Though its 2010 results are still somewhat opaque, since we have yet to year-cycle any hotel purchases, they have still exceeded my expectations. The deals closed since I built my initial model are even better than the previous ones, and with $350 million or so of buying capacity left, the company has plenty of dry powder to take advantage of further deals as they arise. My model reaffirms that shares could be worth $30 or more.

When you get a pitch you like, you need to swing. My confidence in Pebblebrook has never been higher, so I'm doubling our position from 3.5% to 7%. To stay current with all my swings -- as well as the pitches I let pass -- follow me on Twitter.

This article is part of ourRising Star Portfoliosseries, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of ourRising Star analysts(and their portfolios)here.

Both Alex Pape and The Motley Fool own shares of Pebblebrook Hotel Trust. The Fool's disclosure policy advises Pebblebrook to steer clear of a bargain-priced Colorado property known as The Overlook.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Listened in the the call Feb 23rd, all is well. Mr Bortz outlined a confirmed solid strategy playing out as he planned, all good. Solid unlevered balance sheet, good profitability and growth through investment in the hotels in a targeted way. The portfolio of hotels seems to have developed nicely, he still sees room for more growth through acquisition even in markets they are already present in such as LA/Santa Monica. He alluded to flag changes at several hotels in time/when contracts allow including the Sheraton in Santa Monica and by inference the Doubletree in Bethesda.

Mr Bortz also suggested indirectly he sees the company growing to a $2bn size no time span, but that is more than double where it is today.

Dividend is more than covered by hotel profitability, no debt issues and pricing for debt being put on acquired hotels should not rise too much this year say 5-6%, meaning more debt hopefully being added to acquired properties to recycle the capital for more acquisitions.

On that front no lead as to where acquisitions might be but he did suggest it may not include Texas due to sluggish growth, but I might be inclined to think he will add further in the North East, specifically you'd have to assume he wants a stake in the New York and Boston markets before year end, since both markets are leading the industry higher in RevPar growth and ADR. IHG just put the Intercontinental New York Barclay on the market, it'll be pricey, its older and might need capital improvements which to date most PEB hotels have not needed much spent on them, however, Bortz really liked the Buckhead Intercontinental deal and IHG might be willing to do a deal, but it will be pricey ($400-$600K per room?) and they would need to add debt quickly, in order to recycle capital to ensure they don't miss or have to skip other geographical diversification opportunities. Chicago doesn't seem that attractive right now due to Conference business is slack there and there is lots of capacity/hotels coming on stream in Chicago, better PEB likes to be in markets with little or no supply growth.

Overall good call, well received the stock is up following the call even in an indifferent market which is probably heading down 5%.

PEB is still the stock to own for REIT lodging. I just listened to Strategic Hotel(BEE)conf call and boy do they have issues, they said they can't acquire any new hotels until they have sold others just as the market is turning up and paid out accrued pref dividends, they are in a world of hurt for another year plus.

I have been very impressed with how methodical PEB has been in their growth strategy. In retrospect, it all seems so simple how they have gone from an IPO with no assets to where they are today. I have great confidence in their future.